Is this the year to buy biotech? Should we be investing in Europe and Japan rather than the US? And how much should a predicted rise in UK interest rates be factored into all of this?
MoneyWeek’s team of experts give their opinions on the year ahead.
Sell the US and buy the money printers
This time last year, I wrote about the end of quantitative easing (QE) in the US, and what that meant for markets. As it happened, QE didn’t finally end until October. Money printing was “tapered off”, which meant that QE’s impact diminished throughout the year.
But even so, most of my predictions came good in the latter half of 2014 rather than the first. As a result, many of the themes I discussed then are still quite immature and should continue well into 2015.
Let’s revisit the basics. QE in the US added about 25% to the broad money supply. As basic economics tells us, if you increase the supply of something, its price goes down, all else being equal. So when you print money, its price (the interest rate charged to borrow it, or the amount of foreign currency you can buy) falls.
The weak dollar era started well before the 2008 financial crisis, under Federal Reserve chairman Alan Greenspan, who presided over a low-interest-rate credit bubble. QE kept this weak dollar era going for another six years.
But now QE is over – the US is even contemplating its first rate rise since 2009. This puts the US way ahead of the rest of the world, and has lit a fire under the US dollar.
I expect the dollar to keep strengthening both this year and in the foreseeable future, especially while so many other countries struggle with low growth and weak productivity.
The shale revolution may lose much of its sheen in 2015: many drillers are highly leveraged – that is, very indebted – and the oil price collapse will send some to the wall. But the US will maintain its trade balance improvement (as oil imports slide) and falling energy costs will boost consumption.
The strong dollar has already lifted US government bonds as expected, but the US stockmarket looks on borrowed time. A strong dollar is unlikely to be good for the S&P 500, which now looks quite expensive, particularly given that most recent earnings growth has been driven by companies buying back their own shares, boosting earnings per share. US dollar strength is also usually bad news for gold, so I expect the yellow metal to struggle in 2015.
What about elsewhere? A year ago I was talking about the potential for QE in the eurozone. At the time, euro area money-supply growth and inflation looked set to turn negative by mid-year. Both measures have managed to remain positive, but growth (of money, prices and activity) across Europe is dangerously close to zero.
As a result, QE seems inevitable once the details are ironed out. We’re already seeing the euro weaken and that will continue with QE. The good news is that this will be very supportive of euro area stocks, which now look quite cheap.
A strong dollar and weak euro will put great strain on global “periphery” markets (emerging markets, commodities, high-yield bonds, etc). China has slowed noticeably over the last year, although a slower economy, and possibly even a weaker yuan, may benefit the Chinese stock market. But I agree with Tim Price below that Asia’s best market in 2015 should be Japan.
And the UK? I expected its growth spurt to run out of steam sooner than it did. But as the year went on, the banks started (at last) to lend again. While bank lending is only up about 1%, that’s a big improvement on six years of shrinking loans. Combined with much-improved sentiment, the UK has become the strong man of Europe.
Of course, this isn’t always good for the stockmarket, as proved the case in 2014 – and if the UK doesn’t slow of its own accord in 2015, then Bank of England governor Mark Carney will look to start raising rates. So the economic growth sweet spot has probably passed – but that may be no bad thing for either sterling or the FTSE.
• James Ferguson is a founding partner of the MacroStrategy Partnership LLP (macrostrategy.co.uk).
Biotech will finally deliver the goods
The Nasdaq Biotechnology index in the US has gained 285% (with dividends reinvested) from the end of 2009 to the end of 2014. That compares to 105% for the S&P 500, and 42% for the FTSE 100 (all in US dollar terms). That’s an incredible bull market.
Yet the biotech boom has largely passed UK investors by. Why? Because the consumer marketing machine of fund managers, independent financial advisers (IFAs) and the investment press is yet to crank into gear when it comes to the biotech revolution.
But expect this to change this year. Already, Neil Woodford – Britain’s most famous fund manager – is reportedly preparing a dedicated biotechnology investment trust. Where he leads, others will follow.
So why invest in a sector with a reputation for big promises and equally big disappointments? Because biotech is finally delivering. For the first time, we are starting to grasp the workings of the living world, and how to manipulate it.
Advanced imaging techniques allow researchers to see living matter at the cellular level. DNA codes can be read quickly and cheaply by “next-generation” sequencing machines.
Body sensors are gleaning information on everything from exercise patterns to blood pressure. And there is plenty of existing data to be found in patient records and historic drug trials. It all adds up to a torrent of information that can be analysed and put to work by today’s computers using the new discipline of bioinformatics.
Which fields are most interesting? Regenerative medicine – which seeks to fix the root cause of a disease – shows huge promise. Cell therapy can revive body tissue damaged by disease or ageing – watch out for the results of a Phase II stem cell study on stroke victims due for release by Athersys Inc (Nasdaq: ATHX) in the first quarter of this year.
New body parts are being created in the laboratory, sometimes using 3D printers equipped with cellular “ink”. Genetic engineering, via new techniques such as CRISPR (clustered regularly interspaced short palindromic repeats – perhaps best described as genome-editing), allows scientists to alter the function of cells. And immunotherapy, which harnesses the body’s own immune system, is proving effective against cancer.
Savvy investors have already backed UK market newcomers such as immunotherapy specialist Circassia (LSE: CIR) and genomics group Horizon Discovery (Aim: HZD). But in 2015, biotechnology will go mainstream in the UK. Make sure you’re positioned to profit.
• Tom Bulford writes the Red Hot Biotech Alert letter (moneyweek.com/biotechalert).
Betting on a nasty surprise for interest rates
Of all the economic variables out there, interest rates are the single-most important determinant of the performance of most assets. The boom in recent years has been driven to a great extent by the record-low interest-rate environment.
And while City economists have consistently predicted rising rates in recent years, my mantra has always been: “lower, for longer”. But there comes a time for change.
Right now, the City expects UK interest rates to see a small rise to just 0.75% later this year, and for the base rate to remain there for the rest of 2015. But it’s always sensible for a contrarian investor to look at what could upset the consensus.
Could the Bank of England actually lose control of rates? To see how this can happen, just look at Russia, where the central bank has already been forced by the rout in oil prices to bow to the market’s will.
As its currency has been driven lower, pushing inflation higher, the Russian central bank has had to push up interest rates to a whopping 17% to keep foreign capital inside the country, maintain confidence in its bank notes, and to prevent inflation from rocketing.
It won’t be oil that trips up the pound, and forces Bank of England governor Mark Carney to do something similar. But what could? A banking crisis is one possibility, what with a great property bubble once again casting a potential dark cloud over the banks.
Or perhaps some kind of political upset as Britain goes to the ballot box this spring. That’s not far-fetched either. The truth is, there are many potential black swans out there. We might see an entirely unexpected series of factors culminating in an upset for Carney.
The UK is a small nation. Yes, it’s great that we have a degree of control over our own currency and our interest rates. But it can be dangerous too. If, for whatever reason, the Bank of England is called upon to save the pound, then interest rates will be the go-to tool of choice – and that would be painful for gilts in particular.
The point is that we don’t need to know the precise events that could lead to a shock rate rise – we just need to know that most people in the market are betting the other way. The nature of contrarian bets is that they offer great odds, giving us considerable room for error.
So whether you play it by short-selling gilts or shorting sterling (in anticipation of investors rushing out of British assets), there are plenty of ways to get exposure. And if you don’t like shorting, you could always go long gold (which would likely gain in the event of a financial panic), or perhaps even a long-dollar position if you prefer.
• Bengt Saelensminde writes The Right Side email. Sign up free at the-right-side.co.uk.
Buy Japan – and Tesco
In 2014, financial markets dodged a lot of bullets. In 2015, those bullets might hit home. Last year, most expected bond markets to struggle, given the end of QE in the US.
In fact, ten-year US Treasuries began the year yielding 3% and fell to less than 2.2% by year-end (in other words, bond prices rose – prices move inversely to yields).
UK government debt was an even bigger surprise – ten-year gilts ended the year yielding below 2%. It was hard to square these returns and yields with the size of government indebtedness (astronomical almost everywhere). But clearly it helps to have some friendly central banks buying on your behalf. So bonds could yet be surprise outperformers for 2015 – but they can hardly be considered good value.
Two other trends caught many investors on the hop. The first was the oil price collapse, foreseen by virtually no one. The second was the rally in the US dollar, which was more widely predicted, yet still precipitated plenty of volatility in emerging-market bonds and currencies. That’s likely to continue – expect 2015 to be fraught for developing markets.
This year’s wild card is deflation, if Société Générale’s Albert Edwards and independent analyst and financial historian Russell Napier are right. Edwards’ ‘Ice Age’ thesis has bond yields plunging even further from where they are now to new lows (he’s been right on this so far) as Western markets essentially turn into Japan.
The equity side of the equation has yet to live up (or rather down) to his expectations – but 2015 may be the year we finally see that correction.
The threat of deflation could also finally mean full-blown QE in Europe, as James Ferguson notes above. That may give eurozone equities a temporary boost, but the banking system and economy will remain weak: it’s hard to re-animate a corpse.
My favourite stockmarket, as it was last year, remains Japan. Newly emboldened by his December re-election, the prime minister, Shinzo Abe, has now been granted some extra time to pursue his “three arrows” growth strategy. Just make sure you keep hedging the Japanese currency – all that money printing will continue to be bad for the yen.
Closer to home, expect politics to dominate the UK ahead of May’s general election. Political betting markets have Labour and the Tories neck and neck. Ukip may yet end up being kingmakers in any coalition, whereas the Lib Dems could be virtually obliterated.
The UK stockmarket disappointed in 2014, but unlike the US, it’s hardly expensive. There are pockets of value – Tesco (LSE: TSCO) might even be one of them.
Other wild cards include Russia (grotesquely cheap but grotesquely risky) and China. Having pegged their currency to the strongest currency in the world (the US dollar), the Chinese risk exporting deflation to an economy near you in 2015. And having misallocated trillions in the effort to keep their banking system afloat, there’s a serious risk of a Chinese credit event this year. So currency markets are likely to be lively.
And what of precious metals? We’re three years into a correction in the gold price – at least in US dollar terms – and there are tentative signs that the low may be in. If we get outright deflation in 2015 we will also get more monetary stimulus, since Western governments simply can’t afford for deflationary expectations to become widely entrenched.
Could this year be the turning point for gold and silver? If it is, chances are it will be even more exciting to own precious metals miners, which are trading at absolute revulsion levels.
• Tim Price is director of investment at PFP. He writes The Price Report with Simon Akroyd (moneyweek.com/TPR).
Don’t predict trends – back the big research
I don’t believe in trying to predict macro trends. Instead, you should focus on investment opportunities based on improvements in science and technology that meet real people’s needs. Companies conducting research and development (R&D) in these areas are the most likely to be successful.
Like Tom Bulford above, I think biotechnology is fascinating. Therapeutic biotech is a great example of how investing in R&D-focused companies can pay off. The biggest breakthrough of 2014 was Gilead’s new antiviral cure for hepatitis
C. Sovaldi was launched in late December 2013. Harvoni, a one-pill-a-day treatment that cures well over 90% of patients in just eight to 12 weeks with minimal side effects, followed in October 2014. Total sales hit more than $10bn in 2014. That all-time record for first-year drug sales is more than six times the previous record of $1.56bn.
I expect to see breakthroughs in other areas this year – for example, there are several important launches of “antibody drugs” for fighting various cancers and reducing LDL (“bad”) cholesterol.
Another area is cancer immunotherapy treatment. Immunotherapy drugs neutralise cancer cells’ protection against the body’s immune system, enabling the patient’s natural defences to destroy them.
And in late 2014 we saw very positive results from early trials for a pipeline drug that gives hope for early stage Alzheimer’s sufferers – hopefully we’ll see more positive results from that sector in 2015/16.
But biotech is not the only exciting R&D-heavy sector. Similarly fast-growing industries include internet security – Sony’s recent North Korea trouble will no doubt encourage more companies to boost their cybersecurity budgets – and nanotechnology.
There’s also robotics – for example, robot-assisted surgery – and next-generation chip technology that can prolong Moore’s law (whereby chip performance doubles every two years).
There are also ways for private investors to buy into some of the most promising small companies being spun out of university research departments. The common factor these companies share is that they recognise how critical R&D is, if a company hopes to remain or become a market leader.
• Dr Mike Tubbs writes for the Research Investments newsletter. See www.miketubbsresearchinvestments.com for more.
Go for tech stocks and China – and expect
a flat year for gold
I’m very excited about three areas for 2015. The first is technology. There are now more than three billion internet users worldwide, as opposed to 300 million in 2000, back at the height of the dotcom bubble.
That number is growing by 250 million a year, and the growth coming out of Silicon Valley – as well as the likes of Bangalore, London, and even Nairobi – is mouth-watering.
With that in mind, the tech-heavy Nasdaq stock exchange in the US is worth looking at. Ignore the logic-defying valuations of certain social networking companies – the Nasdaq contains many serious companies that generate real cash flow, including Apple, Microsoft, Google, biotech giant Gilead, Intel, Facebook and Amazon.
Collective profits made by companies in the index have trebled since 2008. Yet the Nasdaq is still trading below its 2000 highs, and analysts are far more cautious than during the dotcom era. I believe there is a lot of potential upside to come.
Second is the Shanghai Composite index of mainland Chinese stocks. It’s been a relative dog for years, but that changed in 2014 – it rose by 40%, outperforming Hong Kong, India and all the other Asian markets.
That could continue – there’s the potential for stimulus from the Bank of China and there’s the China Stock Connect plan that links Hong Kong’s brokerages and markets with the mainland, meaning Chinese bourses are now open to foreign investors.
The third area I’ll be monitoring closely for opportunities is oil. Oil price crashes like the one that began in July (resulting in a 47% fall so far) are once-in-a-decade events. Almost every single one I have looked at (1991 being the exception) was followed by a monster rally.
Timing is everything, of course. But at some stage in 2015, we’ll see a huge snap back. Get it right, and there’s big money to be made. The question is: does this crash stop in the $50s – or do we go lower first?
As for gold, its time will come again – I’m just not sure we’re quite there yet, at least not in US dollar terms (it’s looking better in other currencies). The gold price pretty much ended 2014 where it started, and I suspect it’ll do something similar in 2015. I’m currently looking at a low of $1,050 per ounce, and a high of $1,390.
Of course, I reserve the right to change my mind as events unfold, as there are a lot of potential threats out there that could cause a panic and drive the price higher.
Gold mining stocks are another matter – what a train wreck. They’ve been much weaker than gold. Anti-commodity sentiment amid the oil price crash hasn’t helped. But bear in mind that cheaper oil should help them in 2015, as their input costs (energy makes up about a third of mining costs) will fall.
Assuming the gold price doesn’t drop by too much, miners’ balance sheets should start to look attractive. Meanwhile, the stage is slowly being set for another boom in exploration, but we’re still two or three years away from that I’d say.
• Dominic Frisby writes for Money Morning, MoneyWeek’s free daily email (moneyweek.com/money-morning).
Cheer up: British stocks will do well
As a small-cap specialist I’m glad to see the back of 2014. UK stocks in general were disappointing, and the Alternative Investment Market (Aim) was particularly poor, falling by 17% over the year. However, I feel quite upbeat on the prospects for Britain’s domestically focused companies.
Admittedly, being a stock bull feels rather unfashionable when I look at the relentlessly downbeat reporting from much of the media. But I think that this has been massively overdone.
Yes, there are plenty of big-picture things we can worry about if we want to. But you just have to look at the way that the oil price crash has been reported to see a good example of this negativity.
As far as I’m concerned, falling oil prices are a clear net benefit for the world – it’s like a huge tax cut for those of us who are consumers. Yet we seem to have focused more on the bad things that might happen to Russia and other oil producers; on how lenders to energy companies might suffer; and on whether it means China is slowing down.
It’s a similar story with another media bogeyman – the spectre of deflation. The type of deflation we should worry about is the falling prices that accompany a chronic lack of demand, where consumers simply can’t or won’t spend and companies won’t invest.
This sort of deflation might be an issuein parts of the eurozone. But falling food and energy prices in the UK aren’t a sign of demand deficiency – our economy grew at close to 3% last year. Instead we have a healthy employment rate and a welcome return to growth in real (after-inflation) wages.
So I think sentiment is definitely worse than is justified by reality. But that’s a good thing – markets need a bit of scepticism to thrive. Nothing’s more dangerous than a bullish consensus. What might cheer the market up?
A clear-cut election victory for a market-friendly government might help – but perhaps even just getting the election out of the way will be enough to get things going. There’s one consolation from last year’s mediocre performance – it has left equity valuations looking very reasonable.
The FTSE All-Share’s price/earnings ratio is a bit below its long-term average. In a world starved of yield, UK shares also offer a superior income. So in all, modest valuations plus a helpful economic backdrop should equal higher share prices. That means I’m looking for a recovery on Aim, led by technology stocks, and a decent return from UK equities overall.
• David Thornton writes Red Hot Penny Shares. Sign up to his free Penny Sleuth email at www.pennysleuth.co.uk.
A mini-boom before the bust
According to the highly regarded cyclically adjusted price/earnings ratio (Cape), US stocks are currently priced at about 80% above their long-term average valuation since 1871. But does this overvaluation necessarily mean that stocks will have a bad year in 2015?
Before we jump to conclusions, we should consider some other key figures. Since 1871, US inflation has averaged 2.3% and the ten-year Treasury bond yield 4.6%. Today, inflation is barely 1% and the bond yield 2.1%.
Yet companies are growing their earnings slightly faster than the long-run average of 4%. Against this backdrop, stocks deserve to trade at above-average valuations. And it could continue in 2015.
Inflation should stay low, given the oil price slide. That’s good for stocks, provided we avoid deflation. Interest rates may rise, but not by much. And the lower oil price should boost consumer spending and cut input costs, boosting profits.
In fact, 2015 is shaping up to be a bit like 1999. The oil price is weak; the US dollar strengthening. Russia is struggling; it defaulted in 1998. Interest rates are too low, just as in 1999, when central banks overreacted to the Asian and Russian crises and the failure of the huge hedge fund, Long-Term Capital Management.
These are exactly the conditions needed for a boom. We got one in 1999, that pushed already overvalued stocks to even more extreme levels. I think we could get a similar mini-boom in 2015.
Of course, this is only a forecast. And there’s a high risk that it’s wrong. So stick to out-of-favour and undervalued shares, as well as cheap stockmarkets. Keep 25% of your portfolio in cash and safe “near-cash” investments.
And remember this: if the falling oil price propels stock prices higher over the next 12-18 months, a rising oil price could easily be a catalyst for the next crash – just as it was in 2000 and 2008. So consider energy-related investments as a hedge.
• Simon Caufield writes the True Value newsletter. Contact 020-7633 3780.